Euro Pounds Brief Thursday 8th March 2007

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Thursday 08/03/2007

• Sterling stabilises ahead of MPC rate decision ad Midday
• US economy showing signs of weakness according to survey
• Goldman Sachs sees three rate cuts in year ahead
• Euro advances ahead of expected ECB hike
• New Zealand hikes to 7.5%; more moves expected
• Oil ticks up on demand concerns from US holiday driving season

US Dollar:

The dollar came under pressure yesterday as the Beige book survey said several districts had noted slowing
economic activity in the most recent period. This appears to be adding to pressure from markets for the Fed
to begin cutting rates going forward through 2007. In a report by Goldman Sachs it notes that it expects the
Fed to cut three times to 4.5% basing their predictions on a weakening labour market.
With the Non-Farm payroll data due tomorrow and central bank decisions elsewhere today there should be
little dollar-driven movement. Cable is struggling to trade away from 1.93 whilst the Euro-dollar cross will be
looking to break 1.32.

Pound:

The MPC release their decision for interest rates in March at 1200GMT today. With the inflation outlook receding
somewhat futures markets now have only a 13% chance of a rate hike priced in for today. Anything else
would be a huge shock to markets but the MPC have shown that they’re not afraid to do the unexpected. Most
investors think the MPC will adopt a wait and see stance but we should see at least two members voting for a
hike. In addition the recent dump in the equity markets will probably persuade the MPC to hold. As ever we
may see some odd movements in markets as traders put hedges into the market to protect their backs.
Overnight tonight we should see the HBOS house prices for Feb so we’ll see if recent growth has been tamed.

Euro:

ECB rate decision today and following Trichet’s usual clues at the previous press conference we are fully expecting
a hike of 0.25% today. This shouldn’t have a great deal of impact on markets as it is fully expected.
The decision is due at 1245GMT with the usual press conference to follow. Investors will be watching the
press conference with baited breath following mixed reports hinting that the hike cycle may come to an end
following this move. The yield curve has recently flattened out so we should see a volatile session.

General News:

• The yen held it’s ground overnight with Asian equities rallying and speculation that some carry trade
unwinding is ongoing.
• The Reserve Bank of New Zealand last night raised rates to 7.5% with Chairman Bollard noting that
another hike may be necessary. This move should bring back some carry trade business with an increased
yield advantage.
• Oil traded higher yesterday and overnight ahead of the expected fuel demand in the US as driving season
approaches. Geo-political events such as the Iranian situation seem to have taken a bit of a back
seat.

Interbank foreign exchange rates:
Updated 7th March
G BRITISH POUND / US DOLLAR 1.9307
GB POUNDS / EURO 1.4666
EURO / US DOLLAR  1.3171
GB POUND / JAPANESE YEN 225.20
GBP/AUD 2.4849
GBP/NZD 2.8327
GBP/ZAR 14.2801
GBP/CHF 2.3560
GBP/CAD 2.2751
GBP/SGD 2.9503
GBP/THB 62.979
GBP/HKD 15.0990